Acc530_m03_B - Module 3: New costing methods Introduction...

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Module 3: New costing methods © Curtin Business School 1/10 Introduction In this module, you will be learning about a new method of applying overheads to products. This new method is known as activity-based costing and is a more accurate method than the method taught in module 2. You will also look at identifying non-value added costs and the methods used to eliminate these costs. Topics Learning outcomes When you have finished studying this module, you should be able to: Activity-based costing identify and classify activities at their hierarchical level apply the technique of activity-based costing. Activity-based management identify value-added and non-value added costs and the methods used to reduce and/or eliminate non-value added costs. Before you begin… You should familiarise yourself with the relevant sections of your textbook before working through these module notes: pages 170 to 189 on activity-based costing and activity-based management. If you have any questions regarding the content of these module notes, refer to the textbook for further explanations. If you need to seek clarification from your tutor , make sure that you have carefully read the relevant sections of the textbook and the module notes beforehand. Activity-based costing In the previous module, overhead cost was applied using a single cost driver and a single predetermined overhead rate. This essentially averages out the manufacturing overhead and allocates it to the products. This can create problems when an organisation is producing more than one product.
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Accounting (Managerial) 530 Module 3 – New costing methods © Curtin Business School 2/10 Review the example given on page 180 and 181 of the text to understand the problems. Activity-based costing (ABC) supplements traditional costing methods. It is not used to completely replace the traditional method for reasons that will be explained later. If you were to look at different texts, you would notice a variation in the number of steps for using ABC. However, we can classify the steps into two main stages: Stage 1 Identify the activities that relate to the organisation’s products . All activities that are in the value chain have to be included. This is usually done by observation, interviewing employees, or a combination of both. It is also necessary at this point to classify the activities as unit-, batch-, product-, customer- or facility- level activities. Refer back to module 1 to understand the different level activities. Once the activities relating to products have been identified and classified, group them into homogeneous cost pools . A cost pool is essentially a ‘bucket’ that accumulates all costs that relate to a single activity. A homogeneous cost pool is one where each cost component is consumed in roughly the same amount by each product line. If a product line consumes significantly more of a cost component than other lines, a separate cost pool is formed. The reason we need to get a cost pool that is homogenous is to prevent errors when
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Acc530_m03_B - Module 3: New costing methods Introduction...

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